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DJ EuroStoxx50 Futures Volatility Forecast (15/05/2011)

The European Index has been inevitably pushed down by commodity prices (and particularly oil) because both asset classes have a fairly robust positive correlation. The DJ EuroStoxx50 futures opened at 2,877 dropped to 2,895 and then collapsed to 2,857 the last Friday.

The volatility is now around 0.98% – 1% (15.5% – 15.8% in annual terms) but despite the bearish week the TGARCH plot looks extremely stable and, at the right hand part of the chart, it is evident that the volatility curve is even downward sloping.

Clearly, the DJ EuroStoxx50 is not a market which presents positive correlation between price and volatility and therefore such symmetry should be interpreted as a warning signal. The drop we saw the last week should now welcome an initial sideways movement which should be then followed by a further plunge of futures prices whilst the volatility is likely to increment and achieve readings around the 1.1% area (17.4% annualised).

The HyperVolatility team is moderately bearish on DJ EuroStoxx50 futures because we believe the down movement is going to continue over the next week even if the chances of a sideways play of the price action, particularly in the first half of the week, are fairly high. Consequently, we will wait for the volatility to give us the entry point but by the end of the week the price should retest the 2,815 – 2,825 area.

Nevertheless, should the sideways movement remain the predominant “feature” of the upcoming days we would not enter the market at all.

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